How often have you ended a call with your accounting team feeling befuddled about an accounting term? If your answer is a lot of times, then, you’re not alone. A lot of business owners in the US (and at other places too) aren’t familiar with common accounting terms and definitions.
However, in order to manage your business and finances properly, it is really important to latch on to basic accounting concepts and terminologies. If you want to learn, then, keep reading!
In this blog, Finsmart has compiled a handy list of 16 basic accounting terms and definitions for US-based businesses. These terminologies and definitions will define business accounting basics for you and give you insights on how to keep your business operations running smoothly.
Accounting terms and definitions
Are you ready to explore our list of basic accounting terms and definitions? Let’s go!
#1 Cash flow
You must have heard this term while having a conversation with your accounting team. Cash flow depicts the net amount of cash and cash equivalents coming into and going out of the business at any given time. In simple words, it is the calculation of all cash collected and spent on business operations, investments, and financing.
#2 Cash flow forecasting
As the term itself suggests, cash flow forecasting involves predicting the future flow of cash that will move through (in and out) your business bank accounts. This basic accounting term will help you create scenarios based on new projects or investments; let you determine when to invest in a business, and also pay off debts or pay yourself correctly.
#3 Allocation
Most entrepreneurs allocate tasks to different team members to lighten the workload and make business functions run effectively. This basic accounting term is something like that. Allocation is the process of assigning funds to various accounts or periods. It can also be used to divide costs between different departments or activities within a company.
#4 Credit/Debit
Credit as a basic accounting term means an increase in a liability or equity account or a decrease in an asset or expense account. Debit, on the other hand, is an increase in an asset or expense account or a decrease in a liability or equity account.
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#5 Income sheet
Another important accounting definition for businesses to keep in mind! The income sheet shows the company’s financial performance (net profit) over a certain period. It tells the financial story of the business over a period of time. The income sheet is an amazing benchmark tool for businesses to measure performance and understand profit.
#6 Accounts Payable (AP)
Accounts Payable (AP) represents money your business has incurred but has not yet paid. In other words, this basic accounting term represents the amount due to vendors or suppliers for goods or services received that have not yet been paid for. AP is recorded as a liability on your balance sheet.
#7 Accounts Receivable (AR)
Accounts Receivable (AR) represents the money due to your business for goods or services it has provided. It includes all of the revenue (sales) that your company has provided but has not yet collected payment on. AP is recorded as an asset on the balance sheet that is likely to convert to cash in the short term.
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#8 Accrued Expense
As the accounting term itself suggests, an accrued expense is a type of expense that has been incurred but hasn’t been paid or for which there is no expenditure documentation yet. A journal entry is created to record an accrued expense in place of documentation. An accrued expense is generally expected to be paid for within quite a short period of time like next week or next month.
#9 Asset (A)
Another basic accounting term you might have heard from your accountant. An asset is defined as anything of value or a resource of value that is owned by your business and can be easily converted to cash. These are listed in descending order of liquidity. Cash, A/R balances, inventory, buildings, office furniture, land, and vehicles are all considered assets.
#10 Equity (E)
Equity (E) can be found on a business balance sheet and is one of the most common pieces of data employed by analysts to assess a company’s financial health. It denotes the value left over after liabilities have been removed. To be more precise, equity represents the money that would be returned to your business’ stakeholders if all of the assets were liquidated and all debts were paid off.
#11 Inventory
Inventory is a basic accounting term used for raw materials, produced goods, and goods that are available for sale. There are 3 types of inventory – raw materials, work-in-progress, and finished goods. Inventory is classified as a current asset on a business’s balance sheet. As goods are sold to customers, the inventory account becomes lower.
#12 Liability (L)
All debts that a business has yet to pay are referred to as liabilities (L). These are settled over time through the transfer of economic benefits including goods, money, or services. Common liabilities in accounting include Accounts Payable (AP), payroll, and loans.
#13 Interest
Another basic accounting term every US-based business should have an idea about. Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance. It is often reflected as an annual percentage of the amount of a loan. Interest in accounting can either be simple or compound.
#14 Journal Entry (JE)
Journal entries (JE) are raw business transactions that are recorded in manual accounting or bookkeeping systems in chronological order by date and posted to the appropriate accounts in the general ledger. Each journal entry comprises a unique identifier, date, debit/credit, amount, and account code.
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#15 Payroll
Since you are a business owner, it is obvious you give wages, salaries, and bonuses to your employees. The total of all the compensation that a business must pay to its employees on a given date or for a set period is called payroll. It often appears as a liability on your balance sheet showing what your business owes in terms of unpaid wages, bonuses, and more.
#16 Receipts
We are certain most of our readers know about this accounting term. For those who don’t, receipts are documents produced by a business for its customers after they have paid for goods or services. Business owners should save received receipts because they can prove that their incurred expenses are accurate.
Basic accounting terms and concepts
Our list of basic accounting terms and definitions ends here. But your accounting journey has only begun. You are likely to come across more unfamiliar accounting terms, finance phrases, and acronyms. Whenever that happens, speak with your accounting partner to get the exact meaning and insights.
Got any queries to ask? Send them to info@finsmartaccounting.com and have them answered by our accounting experts.
Check out these services as well if you operate or want to scale in India:
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Founder & Director
Shalaka Joshi, a Chartered Accountant passionate about outsourcing and problem-solving, brings over 20 years of extensive experience in accounting, payroll, and MIS reporting to her professional endeavors
